Understanding Money

What is Money?

Money is known to everyone now-a-days but many don't know now to define them. Money has been defined in different ways by different people over the period of time. According to Professor Alfred Marshall "Money constitutes all those things which are at any time and place, generally accepted without doubt or special enquiry as a means of purchasing commodities and services, and of defraying expense." 

In other words money is a commodity that is accepted by the general population as a mode of economic exchange. Money is the medium in which prices and values of a commodity is expressed that circulates over different countries and for different people.

In the past people used different items as money such as cowry shells in Africa, large stone wheels on the Pacific island of Yap and Rice as a charge for labors. All these forms of money have three common functions.

Functions of Money

There are three major Functions of Money in the economy.

• Money is a medium of exchange 

Money is accepted as a method of payment everywhere and by everyone. For instance if a person goes to a shop and takes a juice the shopkeeper accepts Ngultrum note as an exchange for the juice.

• Money is a unit of account 

Money is used as a measuring instrument of the value of a commodity. For instance if a person purchases a new table, the value of the table could be one bag of rice at todays price, but it would be convenient for the person if the price were set in terms of money because it is a common measure of value across the economy.  

• Money is a store of value 

Money can be hold on for future spending. For instance if a person has Nu. 500/- and he keeps the money with him so that he can spend the money tomorrow with the same value. But holding money over a long period of time would erode the value of the money due to inflation.

Characteristics of Money

The first forms of money were very simple. In other countries, tobacco, wooden coins, and receipts from cotton warehouses were used for money. These early forms of money lacked the flexibility and widespread acceptability of current money. 

In order to use something as a money it should now have the following characteristics:

 

• Durability 

Money should be able to stand up under constant use.

• Portability 

Money should be in a size enough so it can be conveniently carried in clothes, pockets, or purses.

• Divisibility 

Money must be made in various units. A person should be able to make change. By having various units of money, goods of various value can be paid for, and change for larger units of money can be made. Barter, on the other hand, requires goods that are traded to be of equal value.

• Uniformity 

 Every bill or note and coin of the same value needs to look the same. 

• Acceptable 

Money needs to be easily recognizable. We should also be able to recognize genuine money from counterfeit. 

• Relative Scarcity 

Money needs to be hard to manufacture. If it were possible to manufacture money as easily as any other good, we would be flooded with counterfeit currency. Our money is a hard-to manufacture special paper and metal coins that have proven to be very difficult to duplicate. Money also could not be common substances like sand or clam shells that anyone could pick up on a beach. Money must be made of scarce or difficult-to-make goods.